The UK government’s Export Credit Agency (ECA), UKEF, has a mandate to ensure that no viable UK export fails for lack of finance or insurance.
The need for an ECA to support its countries export strategy is fundamental to ensure continued SME growth and provide government-backed loans, guarantees and insurance to companies for their home countries to help them do business overseas.
The British Exporters Association (BExA) has reported on UKEF’s performance since 2009. In the last year, UKEF reported a £6.8bn turnover increase in volumes to exporters, who , selling into 72 countries and responsible for sustaining around 47000 jobs. But is this enough for UK businesses, SMEs in particular, , when benchmarked against Export Credit Agencies from other countries?
Marcus Dolman, Co-Chairman for Large Exporters at BExA, said: ‘It is encouraging that near 80% of supported exporters were SMEs, but the investment is needed to continue the work informing and engaging with SMEs to deliver on the Government’s ambitions to grow the exports of this demographic.’
TFG reports on BExA’s 10th Annual Benchmarking Review of UKEF versus its peers
Number of Issued Guarantees/Policies since 2010
Despite showing continued improvement, UKEF’s transaction numbers are nearly 5 times lower than US Exim’s, and less than half the volumes of EKN, which has shown impressive growth in both trade transactions numbers and volumes.
Proportion of SMEs versus MSBs
Proportion of Small and Medium Enterprises (SMEs) funded versus lower risk Medium Sized Businesses (MSBs) remains low for UKEF, particularly when compared to US Exim, Euler Hermes and Export Finance Australia. BExA continues to recommend building out products and strategies to provide payment risk protection for SME exports, particularly post Brexit.
Partly owing to Basel III and compliance regulations, the difficulty SMEs have in accessing export finance continues to be a big barrier. Given that they have just a small number of banking relationships, and find it hard to start new banking relationships, SMEs will often struggle to access bank finance to grow their export contracts.
Interestingly, current EU regulations prevent export credit agencies from covering short term trade to Europe, North America, Australasia and Japan. Brexit might have a positive impact on short term cover, allowing UKEF to provide short term cover for all destinations, which could be beneficial for exporters.
Business volumes since 2013 increase
UKEF volumes continue to show an increase as the Export Strategy has been put into action. US Exim volumes are looking to pick up now that it received its quorum of Board members in early 2019 which meant that it is able to authorise new businesses exporting over US$10m in transactions, which is the first time this has happened in the last 4 years.
Previous 5 years daily closing Spot rate of sterling – source: Bloomberg
The foreign exchange rate volatility in the past 3 years since the EU Referendum continues to be challenging for UK domiciled businesses. Brexit uncertainty could easily challenge the profitability of an exporter’s balance sheet unless there is FX protection in place, yet the cost of hedging instruments and contracts from FX houses is unaffordable for many SMEs trading overseas. BExA recommends that UKEF provides FX risk protection. UK exporters often have to provide fixed price bids in euros or dollars, yet by the time a tender is contracted, the business might need to carry out the contract at a loss if the exchange rate moves unfavourably, a significant problem for an exporter.
Other recommendations suggested by BExA in its benchmarking paper include:
- A marketing campaign informing SMEs of options for UKEF export finance support.
- Widening the role of the British Business Bank (BBB) to cover SME bank market failure including for clearing facilities, delivery of working capital finance and medium term finance for small projects.
- Signing up more non-bank lenders for delivery of support. Currently one non-bank lender is authorised to provide supplier credits.
- Post Brexit, UKEF to provide payment risk protection for SME exports, including European, North American and Australasian destinations.
- UKEF to build on its ability to manage foreign exchange risk in 62 currencies and provide tender to contract exchange risk cover for SMEs.
- Build on the aims of the Export Strategy and have UKEF, DIT and DfID work together to give UK SMEs the widest range of opportunities and support for overseas aid